There has been a lot written recently about executive compensation. What got me thinking about it most recently is an article in the WSJ.

Compensation should serve to 1) attract, 2) retain and 3) motivate talent. The third point I’ll save for another posting. Satisfying the first two requires firms to benchmark against the other firms that are competing for the same talent (note: firms that compete for talent may not necessarily compete for sales). There is an entire industry of HR consulting and executive recruiting firms that earn their fees helping companies with this benchmarking.

Remaining wage competitive is the reason so many banks and auto manufacturers are worried about government imposed caps on compensation. The logic goes that if they can’t offer competitive compensation, they won’t be able to attract the talent necessary to salvage their companies. What’s missing is any acknowledgement of the winner’s curse. Compensation is a great example of how imperfect, private information can cause a bidder to overpay.

There’s no doubt in my mind that some people are paid more than the actual value they add to a company – at every level. Junior analysts at investment banks are Excel monkey. I don’t care if they live in the office. Over time, through the absurdities of corporate promotion policies, people advance and their earnings become ever more disconnected from the value they add. A sense of entitlement seems to have been derived in part from unreasonable wage expectations that leaves illegal labor filling in the jobs Americans don’t want.

There is reason to believe the wage difference between highly developed economies such as the US and the rest of world is not sustainable. A readjustment of our wage expectations may be in order as economies such as China, India and Brazil realize their potential. While I’m skeptical about a flight of valuable services jobs oversees akin to the offshoring/outsourcing trend of recent memory, I do believe competition from foreign labor markets will exert a downward pressure on wages.

Along the way, there will be corollary lifestyle adjustments in order: smaller houses, fewer cars, maybe even less consumer debt and more savings. I think that’s the kind of slow recovery we are in for after this last bubble’s burst, which isn’t necessarily a bad thing. There’s substantial evidence that income inequality leads to instability, and in a digital, wired world images abound of how much better the haves have it. The manifestation is anti-western sentiment, couched in other issues. The transition to lower wages and consumption habits won’t be painless but managed well, it will help us get to a better place.